Jeffrey Gundlach says yuan is on its way to reserve status

June 10, 2014, 2:37 PM ET

DoubleLine Capital founder Jeffrey Gundlach talked interest rates and currency debasement Tuesday in his latest webcast on the economy and the global markets.

The talk Tuesday came as the economy has largely rebounded from a winter pause that turned U.S. growth negative in the first quarter. Meanwhile, benchmark Treasury yields recently bounced off 11-month lows while stocks hit record highs. Investors looking at the uneasy calm across the markets are concerned about what comes next.

That made him one of the few investors who called a surprise drop in Treasury yields this year, when nearly everyone expected yields to rise. Early on in the year, he suggested 10-year Treasury
/quotes/zigman/4868283/delayed10_YEAR yields would drop toward 2.50% from just over 3% at the start of the year. He also suggested that many investors could be caught on the wrong side of the trade. Sure enough, yields have fallen this year, hitting an 11-month low of 2.44% on May 28 as investors closed out their short positions.

Gundlach’s foresight on benchmark yields didn’t prove as prescient last year. As yields jumped last summer on jitters about when the Fed would begin curbing its bond-buying program, Gundlach miscalled the top, at one point admitting that he got it wrong.

It took the U.S. Mint 2 year to produce the first 1 million coins. Gundlach shows a graph on the purchase power of $1 from the time the Fed was established in 1913. In 1910, price for a gallon of milk was 4 cents to 5 cents. Today it’s $3.19 a gallon.

Gundlach talks about the half penny, which was authorized for production by the Coinage Act of 1792. It was discountinued in 1857 but at the time, it had about the purchasing power of a dime today. The dollar became the world’s reserve currency in 1921, says Gundlach.

Chinese yuan appears to be on its way toward reserve currency status, says Gundlach. U.S. dollar is still number 1, the euro number 2, the Yen number 3. Chinese yuan has found it’s way to number 9, up from 35 in 2001.

Global interest rates are negative in Japan, Gundlach says. Everywhere else, they’re at a real yield. Clearly, the interest rates levels in the U.S. are “very, very high” versus the countries in Europe and in Japan.

Demographic change in society is with us for the next 15 years or so, with the population of American’s 65 years and older on the rise, says Gundlach. 85 and older crowd by the year 2025 shows a “massive” increase.

We’ve seen downgrades over the past 3 years to Chinese economic growth. I would bet that the 2014 expectations will be revised lower, says Gundlach. It just seems that China is underperforming expectations. China could easily come in below 7% economic growth this year.

Gundlach shows a slide on lumber vs. homebuilders index from late 2009 to the present, with a large divergence between the two. I don’t think housing prices are going to do much, he says. He doesn’t expect any sort of crisis in home prices. New home sales will be less of a support for the economy than the market believes.

The 30-year U.S. Treasury posted the third strongest year-to-date return since 1974 in the first four months of 2014, Gundlach says. He thinks 30 year Treasury will see lower yields between now and year end.

New home sales are basically the same levels as they were at the depths of the recession. Millennials won’t come back to buy homes as previous generations did. I think the people in their 20-30s have been “scarred” — they see housing as risk, not security.

Total Return Bond Fund average price $97.73, with duration of 3.38 and average life of 5.20, vs. Barclays Capital U.S. aggregate Index at $105.75, duration 5.61 and average life of 7.69, Gundlach’s chart shows. Performance in all of the DoubleLine funds has been good so far this year, says Gundlach.

As growth slows, will the Fed cave in and taper, someone asks. The Fed is absolutely determined to get this thing down to zero, says Gundlach.

He mentions gold. Gold is at a decision point, he says. Stopped at the high $1,300s. The second half of this year can see prices go higher, he says, mentioning $1,400. I think that looking at the charts, gold could have another “modest performance higher.” I don’t think we’re going to much higher in 2014, however, he says.

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